Central bank gold reserves and sovereign credit risk

Abstract

This paper performs a cross-country panel data analysis to determine whether gold holdings of central banks contribute to sovereign creditworthiness. Higher central bank gold holdings are found to reduce sovereign credit default swap (CDS) spreads, a measure of country risk. This effect is stronger during global and country-specific crisis episodes. We account for endogeneity of central bank gold reserves using an instrumental variables approach. Potential economic mechanisms for the baseline findings include lower likelihood of a rating downgrade and reduction in economic uncertainty. The findings suggest central bank gold can mitigate a nation’s credit risk amidst an uncertain global environment.